Japan braces for era of higher taxes as costs of ageing society rise

Japanese consumers bring forward purchases of big-ticket items ahead of sales-tax rise today as government attempts to make dent in nation's debt

PUBLISHED : Monday, 31 March, 2014, 11:53pm
UPDATED : Wednesday, 02 April, 2014, 12:52pm


Kanako Hosomura has been working on a deadline: complete a spending spree before today for several big-ticket items for her family's home, as well as fully stocking her new refrigerator and freezer.

Hosomura, a 32-year-old housewife from Yokohama, estimates the splurge will cost close to ¥1 million (HK$75,000) from her family's savings, but she says the purchases will save money in the long term.

"Ever since the government announced that the consumption tax was going to rise this year, we have been planning to replace our old household appliances," she says. "And just before April 1, we want to get as much food as we can store at home."

Japan's sales tax climbs from 5 per cent to 8 per cent today, the first increase in 17 years. A further jump, to 10 per cent, is expected to be introduced in a year.

Hosomura has replaced an old fridge, snapped up a new microwave and permitted her husband to upgrade their flat-screen television to a larger model.

"It seemed a sensible idea because if we wait any longer, we will just have to pay more," she says. "And if we want to buy these big items, the tax becomes more of a burden."

The administration says the tax hike is needed to help cover soaring costs for pensions and health care as well as massive government stimulus spending meant to boost the economy. Japanese consumers were urged to spend with gusto ahead of the change.

But the tax increase has not been popular with the public, and the strategy could backfire if the economy plunges again into recession.

Analysts say that this key element of Prime Minister Shinzo Abe's drastic economic measures has put his political future, to a degree, on the line.

"Abenomics" is based on a three-pronged approach of fiscal stimulus, monetary easing and structural reforms. To achieve those aims, the Abe administration has set an annual inflation target of 2 per cent, dampened the appreciation of the yen, set negative interest rates, imposed radical quantitative easing and stepped up public investment.

It was the key element in Abe's campaign before the December 2012 general election, and he won plaudits, and a huge working majority, for tackling an issue that had dogged successive administrations. The flip side, which the prime minister is undoubtedly aware of, is that if his signature domestic policy initiative crumbles, it will inevitably bring him down with it.

And that could happen quite soon.

Should the tax hike fail to propel a significant recovery, the scheduled tax jump in 2015 may be delayed or postponed indefinitely, says Jun Okumura, a visiting politics scholar at the Tokyo-based Meiji Institute.

"At that point, we could begin to see rumblings on the backbenches of the Liberal Democratic Party and calls for change that could spill over into the next party leadership election next year," says Okumura.

While residents grumble that they will have to pay more for products and services in the years ahead, analysts say that Abe's administration had little choice but to act. The government desperately needed a way to pay for pensions and health care in an increasingly greying society.

"To pay for a welfare system in the ageing society that we have in Japan, the government has a number of choices," says Okumura, ticking them off on his fingers. "One is to cut benefits. Alternatively, the government could ask the beneficiaries to pay more by raising their premiums. The government could also keep borrowing more to subsidise the welfare system. Or they could raise taxes."

Abe chose the fourth option to spread the burden more evenly across Japanese society as a fairer alternative than forcing the elderly to pay more for their health care.

The tax system resembles those in some parts of Europe, Okumura says. Sweden and Germany have long had high tax rates and residents have accepted them as the price for comprehensive social welfare systems.

Japan has one of the most rapidly ageing societies in the world, as well as a shrinking workforce that will pay progressively less in taxes as more workers retire. At the same time, Japanese industry has struggled to retain its global edge for two decades. Companies across most industrial sectors here have slipped behind their international rivals, with Sony, Sharp and Mitsubishi seeing their global name recognition fade. Big shipbuilders, steel manufacturers and technology corporations are being outpaced by rivals in emerging economies including China and South Korea that can churn out similar products at far lower prices.

In addition, the nation's finances were further strained because of the March 2011 earthquake, tsunami and nuclear disaster, which devastated hundreds of communities in the country's northeast.

"Mr Abe really needs to fix Japan's public finances because, at present, there is a huge imbalance," says Martin Schulz, senior economist with the Fujitsu Research Institute in Tokyo. "The budget has been in deficit by about 8 per cent for the last 20 years or so and while we might not be at a crisis, something does need to be done."

Little assistance is likely to be forthcoming from Japan's struggling companies. Seventy per cent of them do not make enough profit to pay an annual corporate tax.

The government is considering extending new tax breaks to corporations to help make them more competitive.

Schulz says that even though Japanese consumers will soon be paying more for their products and services, that extra government income will not reduce the national debt. It is now running at an eye-popping 214 per cent of GDP.

"They will never be able to repay that and I think they will just continue to ignore it as much as possible," he says. Japan, he says, would need to post economic growth of more than 3.1 per cent for more than 20 years, an impossibility given the ageing workforce.

Household spending contracted 2.5 per cent in February, the first decline in six months. That suggested inflationary pressures were already in play, or that many consumers were waiting until the last minute to buy big-ticket items. Sales might have also suffered because of two successive weekend snowstorms across the country.

The government insists there have been positive signs in the Japanese economy. The value of the stock market has doubled since Abe came to power, even though it has fallen back of late. Car manufacturers report that output climbed an impressive 7.1 per cent in February. Labour demand is picking up. Experts, though, warn the indicators are in the early stages and still vulnerable.

"The stimulus measures of Mr Abe appear to have reinvigorated the Japanese economy and have stoked investor sentiment," says Will Johnson, head of research and consulting for property analysts Savills Japan. Japan's total property transaction volume was up more than 70 per cent in 2013, compared to 2012, he says. For instance, commercial land prices have corrected to pre-bubble-era levels, he says.

That optimism spreads across the three key sectors of office, retail and residential properties.

Land prices in major cities last year saw their first rise since the global financial crisis of 2008, while consumer prices saw their first annual increase in five years in 2013. As a further boost to the economy, Japan's Diet enacted a record ¥95.88 trillion budget on March 20, up ¥3.27 trillion from the previous year. That was passed partly to head off a downturn in the wake of the tax hike, Abe said.

"We will make every effort to minimise the adverse effects of the consumption tax increase and put the economy back on a recovery track as soon as possible," Abe told a press conference after the budget was passed.

"I am confident the budget will become a strong driver in ensuring a path toward economic recovery," he added.